ECB issues unprecedented forward guidance

The European Central Bank took the unprecedented step of committing to keeping
interest rates "at present of lower levels for an extended period of time"
at its monthly policy-setting meeting.

The ECB is also under mounting pressure to ramp up its stimulus efforts to calm markets after the US Federal Reserve hinted it could completely wind down quantitative easing by the middle of next year.

While various ECB policymakers have separately said that the Bank's approach would remain "accommodative" for some time, this is the first common statement from the 23-strong governing council to this effect. The Frankfurt-based institution had always refrained from "pre-committing" to policy moves in the past.

The move came almost immediately after the Bank of England took the unusual step of publishing a statement which also hinted at low interest rates for the foreseeable future, and added fuel to a rally in the European markets. Meanwhile, the pound and euro have fallen against the US dollar.

London's benchmark index jumped as much as 3.2pc following Bank of England and ECB meetings. The moves have been mirrored by other European stock markets. The CAC 40 in France has gained 2.3pc, Germany's DAX has risen 2pc and the Ibex in Spain is up 2.6pc.

The BoE and ECB statements appear to be geared at setting the pair apart from the US Federal Reserve, which sparked a global asset sell-off last month by signalling that its expansive quantitative easing programme could end by the middle of next year.

Mario Draghi, ECB President, denied that the decision to introduce forward guidance, which he stressed had been taken unanimously by the governing council, had been influenced by the Fed's comments. But he did make reference to the effects of those comments, namely rising interest rates on government bonds.

"We are not reacting to other central bank’s monetary policy decisions," he said.

"We want to clarify what assessment for medium-term outlook for inflation is and what our reactions are."

Mr Draghi did not elaborate on what he meant by an "extended period", though he did say that an exit from the ECB's loose policy is "very distant".

Neither would he be drawn on which economic indicators would influence the ECB's future decisions. Instead he said the guidance was based on the "overall subdued outlook for inflation", "broad based weakness in the real economy" and "subdued monetary dynamics".

Mr Draghi did concede, however, that while the governing council settled on leaving policy unchanged in July, some members called for rates to be cut to fresh record lows this month.

The ECB kept its rates for refinancing, emergency borrowing and depositing cash in the bank at 0.5pc, 1pc and 0pc respectively.